1960 (5) TMI 2 - SC - Income Tax

Whether the assessee company was liable to pay additional income-tax ? and Whether the levy of the additional income-tax is ultra vires ? Held that - Agree with the High Court in the answer given to the first question in the negative. As pointed out by the High Court, the second question does not survive after the first question is answered against the Department. Appeal dismissed.

Summary

Issues Involved:
1. Whether the assessee company was liable to pay additional income-tax.
2. If the answer to question No. 1 is in the affirmative, whether the levy of the additional income-tax is ultra vires.

Detailed Analysis:

Issue 1: Liability to Pay Additional Income-Tax

The primary issue was whether the assessee company was liable to pay additional income-tax under the Indian Finance Act, 1951. For the assessment year 1951-52, the assessee company incurred a loss of Rs. 2,19,848, primarily due to a depreciation allowance of Rs. 7,84,063, converting its profits into a loss for income-tax purposes. Despite this, the company declared dividends amounting to Rs. 3,29,062, which the Income-tax Officer classified as "excess dividend," leading to an additional income-tax levy of Rs. 41,132-12-0.

The Tribunal upheld this levy, interpreting that "even a loss may be a total income," as total income computed under the Indian Income-tax Act could be a negative figure. However, the High Court of Bombay disagreed, holding that the assessee company did not fall within the letter of the law, thus negating the liability for additional income-tax.

The Supreme Court examined the relevant provisions of the Finance Act, 1951, particularly paragraph B of the First Schedule, which imposes tax based on the "total income" and provides for additional income-tax on excess dividends. The Court noted that the Finance Act prescribes rates, while the Indian Income-tax Act imposes the tax, with Section 3 being the charging section.

The Court found that if there is no income, there is no question of applying a rate to the "total income," and thus no income-tax or super-tax can result. The Commissioner argued that the proviso to paragraph B should be read as imposing tax on excess dividends regardless of taxable income. However, the Court held that the words "total income," "profits liable to tax," and "dividends payable out of such profits" are inappropriate when there is no income or a loss.

The Court concluded that the legislative intent was to tax dividends paid beyond a reasonable portion of income, but the language used failed to fit within the scheme of the Indian Income-tax Act. Therefore, the law must fail in cases where there is no total income, and the courts cannot supply the legislative omission.

Issue 2: Levy of Additional Income-Tax Being Ultra Vires

Since the High Court answered the first question in the negative, the second question regarding the ultra vires nature of the levy did not survive. The Supreme Court agreed with this approach, stating that the second question does not arise after answering the first question against the Department.

Conclusion

The Supreme Court upheld the High Court's judgment, concluding that the assessee company was not liable to pay additional income-tax due to the absence of taxable income. The appeal by the Commissioner of Income-tax was dismissed with costs.